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    Is this the first step of the Greece’s ‘Brady Plan’?

    Güven Sak, PhD11 May 2010 - Okunma Sayısı: 1108


    A serious step is eventually taken to prevent the crisis in Greece to spread all around the Eurozone. The first package of €110 billion was not enough. Now a second package of €750 billion is provided; €440 billion from the European Union member countries, €60 billion from the Commission, and €259 billion from the IMF. As a result, a liquidity package of almost $1 trillion, even bigger that the US bailout plan, was announced. So what happened? Is the Greek crisis solved now? Is not Portugal in danger anymore? Did the problems of Spain disappear? No; all problems still exist. But they are not reflected in the magnifying mirror now. With this package European Union saved time for pulling the Eurozone together. Measures that will prevent the transmission of the crisis rapidly all around the region were introduced. So, how shall the European Union use the saved time? Was the time saved only for designing a new Brady Plan?

    Let us first remind about the Brady plan. The name comes from Nicholas Brady, U.S. Secretary of Treasury back in the second half of 1980s. 1980s were marked by Latin American countries which failed to fulfill their debt obligations and had to restructure their debt. Brady plan particularly facilitated the restructuring of the debt of Mexico. Back then, debts of countries were in form of credits, not in form of bonds as it is now. So it was hard to restructure the debt. Interesting feature of the Brady Plan was that it involved a portfolio of collateral that will push down the risk of Mexico. According to this, creditors that resettled with the Mexican government and that agreed to undertake a certain amount of loss had mistrust only in the Mexican government. They knew that they could already collect a part of their receivables upon the collateral portfolio. This portfolio was created by investing a part of sources channeled to Mexico by the US government and the IMF in US Treasury bonds. Brady plan was a market-oriented mechanism to solve the debt crisis and it was designed on the basis of the resources provided within the bailout plan for Mexico.

    So, why the current milieu reminds us of the Brady plan? This is exactly where the first diagnosis lies. The €750 billion plan following the €110 billion package does not solve the problem but saves time for solution. What is the missing part of the plan? There still is no connection with this new package and the fiscal imbalances in Greece, Portugal, and Spain. It is also not certain how the mentioned imbalances will be solved in the future. For instance, it is not planned how the debt stock of Greece will be reduced or how the sustainability of the debt stock will be ensures. It is evident the main problem is that it is not certain how the fiscal coordination across EU countries will be maintained. This is the first point to state.

    And now the second one: The ambiguity about how to secure fiscal coordination across EU countries is the reason of both the Greece crisis and the delay in solution. Do not you think that the lack of fiscal coordination has a role in the determination of the President of European Central Bank for not buying the Greece bonds in the secondary market? In my consideration, the main aspect to be highlighted with respect to Trichet's attitude is the incapacity of European Central Bank about the public finance practices of the member countries. It appears that after realizing the funds gathered by the member countries the Bank saw no harm in holding Greece's bonds in the portfolio of the European Central Bank. It is evident that otherwise the credibility of the step to be taken by the bank would become to be questioned. And this is the second point to underline.

    The third point is related with the Brady plan discussions. The reason why there exist such discussions is simple: It does not seem much likely that Greece tries to pay its debts without restructuring the debt stock. Then, restructuring of Greece's domestic debt with the least damage and strongest guarantees possible will avoid Greek people to be tortured. The issue that should be focused on is to analyze to what extent the bailout package will ensure sustainability. This is where we should focus o.

    So, what shall Turkey do in such an environment? First thing to do is apparent: Turkey should implement measures to reduce the impacts of the Greek crisis. Second, the administrators should avoid being late by arguing that the crisis 'does not hit Turkey' as they did in the 2008 crisis. They should relieve the public from the torture. Third, concrete steps for fiscal rule, legal infrastructure of which was clearly indicated to be completed in the first quarter of 2010 in the Medium Term Program, shall be taken. This fiscal rule issue is the first step to deal with. But will that be enough? No, it will not. It shall be followed by other measures. We will talk about this again later.


    This commentary was published in Referans daily on 11.05.2010